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Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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April 11, 2007

The Nattering Naybob Takes On Verizon Vs. Vonage

The Nattering Naybob has been thinking about this story ...

Vonage Holdings Corp. must pay $58 million plus monthly royalties to Verizon Communications Inc. for infringing three patents on Internet-telephone service, a federal jury ruled...

The jury found that three of five disputed patents were infringed and all five are valid.

... and he is not happy.  Naybob's post contains a long and detailed discussion of what the disputed patents are about.  Most of it is beyond me, but I do get the drift:

To allow a patent like this to stand would be analogous to allowing Verizon to patent the common practice of placement and use of salt and pepper shakers on public restaurant and cafeteria tables.

If these patents and their claims are found valid, Vonage would find it difficult to design an alternative way of hooking its network to the [PSTN].

And so would any VoIP provider as the entire VoIP industry has built its back on the ENUM standard in RFC 3761. Therefore, the entire VoIP industry would have to shut down, and the ENUM internet standard as defined would also be dead.

OK, I don't exactly understand that last part. Nor do I feel competent to judge Naybob's claim that the patent system is in this specific case being used to restrain competition rather than protect legitimate intellectual property rights.  But it does bring to mind Adam Jaffe and Josh Lerner's "Innovation and Its Discontents."  Say Jaffe and Lerner:

Over the course of the nineteenth and twentieth centuries, the United States evolved from a colonial backwater to become the pre-eminent economic and technological power of the world. The foundation of this evolution was the systematic exploitation and application of technology to economic problems: initially agriculture, transportation, communication and the manufacture of goods, and then later health care, information technology, and virtually every aspect of modern life.

From the beginning of the republic, the patent system has played a key role in this evolution. It provided economic rewards as an incentive to invention, creating a somewhat protected economic environment in which innovators can nurture and develop their creations into commercially viable products. Based in the Constitution itself, and codified in roughly its modern form in 1836, the patent system was an essential aspect of the legal framework in which inventions from Edison’s light bulb and the Wright brothers’ airplane to the cell phone and Prozac were developed.

All good, right?  Nope.

In the last two decades, however, the role of patents in the U.S. innovation system has changed from fuel for the engine to sand in the gears. Two apparently mundane changes in patent law and policy have subtly but inexorably transformed the patent system from a shield that innovators could use to protect themselves, to a grenade that firms lob indiscriminately at their competitors, thereby increasing the cost and risk of innovation rather than decreasing it...

The origin of these pathologies goes back to 1982, when the process for judicial appeal of patent cases in the federal courts was changed, so that such appeals are now all heard by a single, specialized appeals court, rather than the twelve regional courts of appeal, as had previously been the case. And in the early 1990s, Congress changed the structure of fees and financing of the U.S. Patent and Trademark Office (PTO) itself, trying to turn it into a kind of service agency whose costs of operation are covered by fees paid by its clients (the patent applicants).

It is now apparent that these seemingly mundane procedural changes, taken together, have resulted in the most profound changes in U.S. patent policy and practice since 1836. The new court of appeals has interpreted patent law to make it easer to get patents, easier to enforce patents against others, easier to get large financial awards from such enforcement, and harder for those accused of infringing patents to challenge the patents’ validity. At roughly the same time, the new orientation of the patent office has combined with the court’s legal interpretations to make it much easier to get patents. However complex the origins and motivations of these two Congressional actions, it is clear that no one sat down and decided that what the U.S. economy needed was to transform patents into much more potent legal weapons, while simultaneously making them much easier to get. 

An unforeseen outcome has been an alarming growth in legal wrangling over patents. More worrisome still, the risk of being sued, and demands by patent holders for royalty payments to avoid being sued, are seen increasingly as major costs of bringing new products and processes to market. Thus the patent system -- intended to foster and protect innovation -- is generating waste and uncertainty that hinder and threaten the innovative process.

Jaffe and Lerner summarized their reform proposals in a Wall Street Journal op-ed piece last year:

Our proposed reforms start with the recognition that much of the information needed to decide if a given application should be approved is in the hands of competitors of the applicant, rather than the [U.S.Patent and Trade Office]. A review process with multiple levels efficiently balances the need to bring in outside information with the reality that most patents are unimportant. Multilevel review -- with barriers to invoking review increasing at higher levels, along with the review's thoroughness -- would naturally focus attention on the most potentially important applications...

And to the litigation issue discussed in the Naybob post:

... there are always going to be mistakes, and so it is important that the court system operate efficiently to rectify those mistakes, while protecting holders of valid patents. Today, the legal playing field is significantly tilted in favor of patentees.

The reliance on jury trials is a critical problem. The evidence in a patent case can be highly technical, and the average juror has little competence to evaluate it. Having decisions made by people who can't really understand the evidence increases the uncertainty surrounding the outcome. The combination of this uncertainty with the legal presumption of validity -- the rule that patents must be presumed legitimate unless proven otherwise -- is a big reason why accused infringers often settle rather than fight even when they think they are right.

Both Jaffe and Lerner and Mr. Naybob make the argument that the stakes in getting all this sorted out are high.  On that, I concur.

April 11, 2007 in Economic Growth and Development , This, That, and the Other | Permalink


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A tip o the hat and many thanks... keep fightin the good fight.

Posted by: The Nattering Naybob | April 18, 2007 at 01:03 PM

Exotic Ho Chi Minh City, still referred to as 'Saigon' by many, has preserved its distinctly Asian feel and ancient culture, where monks pray in the numerous pagodas, temples and mosques. The capital Hanoi, is a pleasant and charming city of lakes, shaded boulevards and public parks. The old quarter, built around the Hoan Kiem Lake, is an architectural museum-piece characterised by its narrow streets. Ha Long Bay, with its 3000-plus islands rising from the clear, emerald waters, dotted with beaches and grottoes created by waves, is one of Vietnam's natural marvels.

Posted by: Vietnam tour operator | April 18, 2007 at 09:09 PM

Those that know me know that I am very conservative in my approach to anything. Conservative means . . . we have the right to do business with anyone who wants and deserves our business. I do not like entitlements either public or private. I have used Vonage for my telephone service and long distance. Not only is their service much less expensive than what the wireline carriers offer, Vonage's service is far superior than the service provided by Bell South (the new AT*T) and Verizon. I had cell phone service with Verizon for three years plus. I just cancelled that cell phone contract. I felt that their service fell below the minimum standards acceptable to me. Verizon, in my opinion, does not have it's customer's interest at heart.

Now, here comes the mighty wireline carrier, Verizon, with all it's money and muscle. They are trying to put Vonage out of business. Like Al Gore, they are claiming ownership of the Internet. I don't believe that they invented it nor do I believe that they own it. I do not believe that they should be allowed to put Vonage out of business just because Vonage is out performing them. If Vonage loses then you as a user of communications also lose.

I very seldom get involved in organized things such as this, but I very much remember the OLD AT&T. I do not want that again. However, it is happening again anyway. Companies like Vonage have given us long distance and local service at very high quality and very low prices. My service cost me basically twenty five dollars a month and that includes all local and long distance calls. Their computerized services are far superior to any wireline carriers, like AT&T and/ or Verizon.

This is your fight too. If Verizon 'whips" Vonage, they are whipping you too. Vonage needs your help in fighting the BAD GUYS here!.

I think that you should pass this on.

R McPeak

A very happy Vonage customer.
A very unhappy Verizon customer, to the point that I canceled service with them last week..

Vonage email contacts, if you want them:

This is a copy of my letter to the CEO of Verizon, sent this date.

Dear Mr. Lataille,

I believe that competition is good for you and good for me. It helps you become more innovative, more lean and quick in the marketplace. And it saves me money, brings me new products and services that make my life better.

Currently, your company is trying to stifle competition and take selection out of the marketplace. I want you to know I support Vonage as they fight to defend my right to a better and more affordable phone service.

It's clear to me Verizon's actions could limit my freedom to choose a communications provider. I am concerned that if you succeed, the cost of phone service for me and many other U.S. consumers may increase. Instead of competing in the marketplace, Verizon has chosen to bully Vonage in the courtroom. I stand with Vonage as they say enough is enough.

Finally, I say to you, Mr. Lataille, why don't you try competing for my business, instead of trying to put your competitors out of business? It's time you get into the real courtroom where consumers are the judge.

I canceled my cell phone account (706) 726-4500 with Verizon in the last week. I tried very hard to talk with someone in your organization regarding the extremely poor service that I was receiving from Verizon. NO ONE at Verizon cared that I was trying to salvage my account with Verizon. I gave up on your company. Now you want to destroy one of your competitors, Vonage, who is doing an excellent job servicing it's customers. Mr. Lataille, I tried to reach your office and you would not make it possible that I could. Perhaps if enough of your customers quit doing business with Verizon, you might someday get the message. Leave companies like Vonage alone. People like me will remember what you are doing here. NO ONE wants the old AT&T back in spite of what AT & T is telling us. Verizon is just another clone.

Long live Vonage. Shame on "old meannie" Verizon. Vonage must be really waxing your tail!


R McPeak
34 Barnsley Drive
Evans, Ga 30809

Former customer of Verizon . . . Existing happy customer of Vonage . . . at my choice!

Posted by: r mcpeak | April 26, 2007 at 10:33 PM

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